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A $200 iPhone should increase its appeal even more, bringing new subscribers to AT&T whose monthly service payments for voice and data will defray the subsidy.

Apple's iPhone has sold very well, even though it's priced at $400 to $500, much more than most people are accustomed to pay for their mobile phone. However, according to an unconfirmed report, AT&T intends to sell the second-generation iPhone for considerably less.

The primary change in the upcoming model will be faster wireless networking, not more internal storage. As with the current model, there will be two versions, a 16 GB one for $500 and an 8 GB one for $400.

But those will be the prices before the carrier subsidy. Fortune is reporting that AT&T, the exclusive provider of the iPhone in the U.S., will reduce the cost of this smartphone by $200 for anyone willing to sign a two-year contract.

Other New Details

Fortune's unnamed source for this information, "a person familiar with the strategy", had some additional details on the iPhone 3G.

He agrees with earlier reports that this device will have a GPS receiver, one of the most requested features.

It will also supposedly be just 9.2 mm thick, down from the current model's 11.7 mm.

The iPhone 3G is expected to go on sale in June, and the current one will go off the market several weeks before then.